How to Get Out of a Home Equity Line of Credit

A Home Equity Line of Credit, or HELOC, provides a flexible way to access your home’s equity. It functions as a revolving line of credit, similar to a credit card, allowing you to borrow, repay, and re-borrow funds up to an approved limit during a draw period, typically lasting around 10 years. Unlike a traditional loan, you only pay interest on the amount used, not the entire credit line.

Homeowners often utilize HELOCs for home renovations, debt consolidation, or emergency expenses. Many homeowners address their HELOC due to changing financial circumstances or a desire to reduce debt. Concerns about variable interest rates, which can fluctuate with market changes and lead to unpredictable monthly payments, also prompt individuals to seek solutions. As the draw period ends, payments can increase significantly as the repayment period begins, requiring both principal and interest payments.

Strategies for Complete Payoff

Eliminating a Home Equity Line of Credit entirely can free up your home’s equity and remove a recurring debt obligation.

Cash-Out Refinance

One common approach involves refinancing the HELOC by consolidating it into a new primary mortgage. A cash-out refinance replaces your existing mortgage with a larger one, using additional funds to pay off the HELOC balance. This combines both debts into a single mortgage payment, potentially at a lower, fixed interest rate, providing payment stability. Lenders require a strong credit score, usually 620 or higher, and sufficient home equity, often at least 20% after the refinance.

Fixed-Rate Home Equity Loan

Alternatively, you can refinance your HELOC into a fixed-rate home equity loan. This involves taking out a new loan with a lump sum payout and a fixed interest rate to pay off the variable-rate HELOC. This option offers predictable monthly payments and protects against future interest rate increases, though the interest rate might be higher than a cash-out refinance. For any refinancing, gather documents such as recent pay stubs, W-2 forms or tax returns, bank statements, and your current mortgage statement. Lenders will also assess your debt-to-income ratio and the appraised value of your property.

Lump-Sum Payoff

A lump-sum payoff offers a direct way to eliminate a HELOC if you have access to substantial funds. This might come from savings, an inheritance, a bonus, or proceeds from selling another asset. Contact your lender to obtain an exact payoff statement, which includes the outstanding balance, any accrued interest, and a “good-through” date for the quoted amount. Payments can be made via wire transfer, certified check, or online, with wire transfers being the fastest method to ensure funds are received by the deadline.

Selling Your Property

Selling your property automatically leads to the payoff of any outstanding HELOC balance. When a home is sold, all debts secured by the property, including the primary mortgage and any HELOCs, must be settled at closing. The title company or closing attorney will request a payoff statement from your HELOC lender, and the balance is deducted directly from the sale proceeds. This ensures the lien on the property is removed, allowing for a clear transfer of ownership to the buyer.

Strategies for Managing Your HELOC

For homeowners not ready or able to fully pay off their HELOC, several strategies can help manage the debt and reduce its impact.

Fixed-Rate Conversion

One common strategy involves converting the variable-rate HELOC balance to a fixed-rate loan, if offered by your current lender. Many lenders allow you to lock in a fixed interest rate for all or a portion of your outstanding HELOC balance during the draw period. This provides predictable monthly payments, as the interest rate will not fluctuate with market changes. The process involves contacting your lender, who will assess eligibility based on factors like your current balance and loan-to-value ratio.

Freeze or Reduce Credit Limit

You can request to freeze your line of credit, preventing any further draws. This helps control spending and ensures the outstanding balance does not increase. While new funds cannot be accessed, you remain responsible for payments on the existing borrowed amount. Lenders may also allow you to request a reduction in your credit limit, which can help prevent over-utilization and encourage more disciplined use.

Aggressive Repayment

Implementing aggressive repayment strategies can significantly reduce your HELOC balance over time. Making extra payments beyond the minimum directly reduces the principal, leading to less interest paid over the loan’s life. When making additional payments, specify that extra funds should apply directly to the principal balance. Utilizing financial windfalls, such as tax refunds, bonuses, or inheritances, to make a lump-sum payment can also accelerate the payoff process.

Closing Your HELOC

Once your Home Equity Line of Credit balance has been fully paid off, formalizing its closure involves a few procedural steps to ensure the account is properly terminated and the lien on your property is released.

Verify Zero Balance

The initial step involves verifying that the HELOC balance is zero. Confirm this by reviewing your most recent statement or by directly requesting a payoff statement from your lender. The payoff statement provides the precise amount needed to bring the balance to zero, accounting for any daily accrued interest up to a specific “good-through” date.

Contact Lender

After confirming the zero balance, contact your lender to formally request the closure of the line of credit. This can be done via phone, online portal, or by visiting a branch, and you will need your HELOC account number and personal identification. Some lenders may require a written request or a specific form to initiate the closure process.

Confirmation and Credit Report

Receive written confirmation from the lender that the HELOC has been closed and the lien on your property released. The lender is responsible for recording the lien release with the appropriate public records office, usually the county recorder’s office. This process can take between 30 to 90 days after the payoff. Finally, check your credit reports from all three major bureaus (Equifax, Experian, and TransUnion) to ensure the HELOC is reported as closed with a zero balance.

Addressing Financial Hardship

Experiencing financial difficulties can make meeting HELOC payments challenging, but proactive steps can mitigate the situation and avoid severe consequences. A HELOC is secured by your home, meaning default can lead to foreclosure, making timely intervention important. Understanding available resources and communicating with your lender can provide pathways to managing the debt during hardship.

Contact Your Lender

The most important initial action is to contact your lender as soon as you anticipate or begin to experience payment difficulties. Lenders are more willing to work with borrowers who communicate openly rather than waiting until payments are severely past due. Explain your situation clearly and inquire about available assistance programs.

Loan Modification Options

Lenders may offer loan modification options to make your HELOC payments more manageable. A modification can involve adjusting the interest rate, extending the repayment period, or temporarily deferring payments through forbearance. The goal of a modification is to reduce your monthly payment to a more affordable level, helping you avoid default. Eligibility for modifications depends on the nature of your hardship, such as job loss, reduced income, or significant medical expenses.

Housing Counseling Agencies

Non-profit housing counseling agencies approved by the Department of Housing and Urban Development (HUD) are valuable resources during financial hardship. These agencies offer free or low-cost services, including budgeting assistance, understanding loan options, and mediating with your lender. Seeking their guidance can provide unbiased advice and help you navigate complex financial decisions.

Foreclosure Risk

While a HELOC is a second mortgage, failure to make payments can lead to your home being at risk, as it serves as collateral for the debt. Defaulting on a HELOC can trigger foreclosure proceedings, even if payments on your primary mortgage are current.